The negative health impact of smoking cigarettes has been well understood for decades. Life and health insurance products reflect it in pricing and reserving – generations of smokers have paid more for protection products. More recently, with the development of the enhanced annuity market, smokers have benefited from their shorter longevity by buying annuities on more favourable terms.

Insurers are able to accurately price mortality or longevity risks for smokers, but the explosion in e-cigarette usage has brought a new challenge. Lack of data on the long-term health effects makes it difficult to pinpoint where an e-cigarette user should be placed on the mortality scale, from non-smoker to smoker. This is compounded by the fact that e-cigarettes are perceived primarily as an aid to quitting traditional cigarettes – many users may still suffer from a history of smoking. The picture is further clouded by ‘dual users’ who continue to smoke traditional cigarettes as well as e-cigarettes.

The IFoA’s E-cigarettes Working Party includes actuaries, underwriters and medical practitioners, and seeks to consider the impact of e-cigarettes on the insurance industry, focusing on the protection market. Over the past two years, we have conducted research based around four streams of work: social and demographic variations, impact of public policy, risk and usage, and finally modelling to bring it all together. Although we cannot present the ‘solution’ yet, in this article we explain the key results of our analysis.

Current landscape

Although the trend has been declining, about 15.5% of the UK’s adult population still smokes. The downward trend is due to a combination of smokers quitting and the growth of a non-smoking population.

In contrast, the use of e-cigarettes has been increasing since they were first sold in the UK in 2004. The pace of growth had been fast, but started to plateau in 2013. Around 5% of adults use e-cigarettes – approximately 2.9 million people.

The use of e-cigarettes is generally confined to current and ex-smokers. Dual users tend to vape to help them reduce their tobacco consumption, while ex-smokers vape to help them overcome smoking. Vaping among those who have never smoked conventionally remains very low, unlike in some countries such as the US, where teen e-cigarette use appears to be endemic.

Smoking is the UK’s leading cause of preventable death and disease. Public Health England reports that e-cigarettes are 95% less harmful than smoking, but these findings are based on limited studies that tend to consider chemical composition rather than directly measuring impacts on health.

Less than half of adults think e-cigarettes are healthier than smoking, and this decreases to one third among smokers who have never tried vaping. The misconception that nicotine drives smoking-related ill-health must be addressed if e-cigarettes are ever to become a widespread cessation tool.

Survey results

We surveyed underwriters to get a broad understanding of industry practices. The respondents mainly represented insurers with a protection focus, but the results show a wide variation in existing policy and personal opinion of the likely developments in this area.

The majority adopted the philosophy of treating e-cigarette users as if they were traditional tobacco smokers (Figure 1 below). Few placed them at the other end of the scale, as non-smokers, or somewhere in between, either adding a rating to non-smoker rates or basing their approach on whether the applicants used nicotine, rather than addressing the form of delivery.

When asked to quantify their concern about the potential impact of e-cigarettes, using a scale from 0 (unconcerned) to 100 (extremely concerned), the median score was 43.5. This might suggest it is an area insurers have to monitor, but perhaps not one that has the potential to be a gamechanger. However, the scores extended from 10-79, implying that some consider the area to be much more significant than others.

This is also reflected in the responses on underwriting practice. While 85% collect some information on e-cigarette usage on application forms, only half collate it for future use. Clearly, this is an area where the market is relatively early in its development and likely to change over time: three-quarters of respondents said that they keep an eye on market developments. This may reflect reluctance to set trends. More than half said that they were consulting with reinsurers and performing secondary research, while less than one in 10 said they conduct their own primary research.

Nearly half of respondents indicated that the next three years would be the key timeframe in which the industry would change its attitude towards e-cigarettes. This stems from both the increased prevalence of users and the publication of further research on effects.

Modelling

The growing prevalence of e-cigarettes has introduced two new smoker classes – those who use a combination of e-cigarettes and traditional cigarettes (dual users) and people who usee-cigarettes exclusively. To build a complete picture of the impact of e-cigarettes, we estimate the transitions among groups and their associated mortality risks:

Uptake – Around 5% of the population currently uses e-cigarettes. The large majority of users are current and former smokers. E-cigarettes are more popular among younger smokers, and have roughly equal uptake between men and women and across social classes.

Mortality/morbidity risk – Analysis of the composition of chemicals released by e-cigarette devices suggests that the concentrations of toxic chemicals is significantly lower than in traditional cigarettes. The extent to which this lowers morbidity and mortality risks is still unknown, but intuitively it suggests lower risk.

Dual usage rates/quit rates – Studies suggest more than half of e-cigarette users have quit traditional cigarettes, but there is a growing group that experiments with different substances and temperatures, who are unlikely to see the devices as quitting aids.

Relapse rates – Around 80% of smokers’ quit attempts fail, although the success rate has been slowly growing. E-cigarettes are now the primary aid used to support quitting. Research suggests that they may have greater ‘stickability’ than conventional nicotine replacement therapies, such as gum and patches; they better resemble traditional cigarettes’ look, feel and rate of nicotine delivery into the bloodstream. When users relapse, it is typically because their device breaks or runs out of charge.

Trends – Vaping devices are becoming more desirable and reliable, with larger batteries and higher-power tanks that enable users to create large vapour clouds. Future trends may also be affected by non-vapourising devices such as heat-not-burn products, which have the backing of tobacco companies. Sociopolitical attitudes towards e-cigarettes are also likely to affect uptake and usage.

An example scenario

In our scenario analysis, we modelled the impact of an increase in quit rates and the corresponding decrease in claim rates and mortality. A reasonable 2% increase in annual quit rates would reduce the excess risk of death falls by 5%, converging towards the never-smoker rate.

For a typical portfolio, this would decrease the present value of smoker claims to around 4%. This impact on the industry is estimated to be around £100m of embedded value.

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The future

With about 5% of the population using e-cigarettes, there is a growing need for the insurance industry to understand their impact.Despite the lack of long-term data, e-cigarettes are likely to be considerably less harmful than traditional cigarettes – but they are still more harmful than not smoking at all. Mortality and morbidity rates are likely to reduce for smokers who use e-cigarettes to cut down or completely stop using traditional cigarettes. Early evidence suggests that e-cigarettes are also more effective than conventional nicotine replacement therapies, which could lead to an increase in quit rates and lower claims on existing smoker business. It could also lead to higher rates of churn, with ex-smokers buying non-smoker policies, potentially impacting the experience of this business, too.

Niel Danielsis head of pricing, underwriting and claims at SCOR Global Life

Mark Paulsonis an associate at Barnett Waddingham, working in longevity consulting